At present, Pakistan's cement industry
consists of 25 cement companies. These companies are operating with a combined
29 cement plants. Out of these, 19 plants are located in the Northern region of
the country and the remaining 10 plants are situated in the Southern region. The
current total installed capacity of cement industry is 47.5 million tonnes per
annum (mtpa). However, adjusting for old plants and overstated capacity figures
by some manufacturers, current effective capacity of the industry stands at
around 41.3 mtpa. North with effective production capacity of 33.5 mtpa while
the South with effective production capacity of 7.8 mtpa compete for the
domestic market of around 23.3 mtpa and export market of 9.3 mtpa.

LOCAL CONSUMPTION

Domestic cement consumption remained
nearly stagnant during the last few years, rising by just 4.5 per cent from
21.03 million tons in FY07 to 21.97 million tons in FY11, due to declining
public sector development spending and moribund private sector construction
activity. However, during 9MFY12 local cement demand has witnessed an increase
of 8.4 per cent YoY to 17.4 million tons, primarily due to accelerating work on
some medium-scale projects and a rise in residential construction.

Going forward, it is expected that the
current momentum to continue at a decent but sustained pace, driven by
significant housing backlog, rising government PSDP spending, construction of
some midsize and large dams, and reconstruction of flood affected areas.

Pakistan is currently facing a shortage
of around seven million housing units. The average occupancy rate per house is
seven persons with a density of 3-4 persons per room, way above the average
international standard of 1.5 persons per room. This indicates a serious housing
backlog in the country.

Moreover, urban population as a
percentage of total population has witnessed a growing trend. With an annual
average population growth of 2.14 per cent, and per capita income likely to
increase above $1,400 by FY15, it is expected that the housing requirement in
the country will grow by 5-6 per cent annually.

On the other hand, at present the
country's per capita cement consumption of 128 kg is much lower than that in
other developing countries such as India (176 kg), Sri Lanka (470 kg), and world
average of 430 kg. This suggests that the industry has plenty of long-term
growth potential that is yet to be tapped. Pakistan's future economic
development, likely to be led by increasing infrastructure spending, should
drive up per capita cement consumption from the current low levels. Pakistan's
cement consumption will reach above 200kg per capita sometime between 2020 and
2025.

DEVELOPMENT & RECONSTRUCTION

Government's PSDP spending has a direct
impact on cement consumption of the country as funds in PSDP are primarily
utilized for infrastructure development. PSDP had shown a strong 5-year
cumulative average growth rate (CAGR) of 20 per cent from FY03-08, which led to
a boom in construction activity and infrastructure development. However, PSDP
expenditures witnessed a significant cut in the last few years due to higher
current expenditures and fiscal constraints. But, in FY12, budgeted PSDP
increased by 58 per cent YoY with emphasis on small dams and for post floods
reconstruction of roads and bridges, educational and medical facilities etc. The
cement industry has seen uninterrupted growth in total cement dispatches over
the last decade (FY01-FY10 CAGR: 12.2 per cent) followed by a demand contraction
in FY11 when volumes dropped by 8.43 per cent YoY on account of devastating
floods in the country. This event had a negative impact on the performance of
cement industry due to supply issues because of damaged transportation routes
and halt in various private and public infrastructure development programs.

As per government's estimates,
rebuilding of infrastructure due to damages will require approximately 7-8
million tons of cement, which represents 15-17 per cent of total production
capacity of the industry. The rebuilding work is underway. However, due to lack
of funds/donations, the completion of reconstruction may take at least five
years.

CEMENT PRICES

During the past nine months, the cement
prices have risen by a significant 23 per cent. With effective capacity
utilization expected to consistently improve to 88.9 per cent by FY15 from 75.9
per cent in FY11, it is estimated that the strong pricing trend will continue in
FY12 and beyond. However, for FY13, the average ex-factory cement price of
Rs385/bag is five per cent below prevailing ex-factory price Rs405/bag.

CEMENT EXPORTS

Luckily, for domestic cement
manufacturers, exports were strongly picked up during the last few years, driven
by robust construction activity in the regional markets including Iraq,
Afghanistan, UAE, and South Africa. Total volumetric exports increased at a
sizeable 43.1 per cent CAGR during FY05-11.

However, it is forecasted that the
export potential remains fully exploited now as evidenced by stagnant cement
exports during first eight months of the current fiscal year. The exports to
Middle East, Africa and other countries will decline by 32 per cent to 2.77
million tons in FY15 from 4.09 million tons in FY11 due to significant capacity
additions in the region, slowdown in construction activities in UAE, and massive
excess capacity of 300 mtpa in China.

Afghanistan, a primary cement market,
accounts for around 40 per cent of the country's total exports. For India, there
was a 10.7 per cent CAGR during the same period in view of warming trade
relations between the two nations and expected removal of nontariff barriers (NTBs)
on Pakistani cement exports would boost up cement exports to India by 39 per
cent YoY. However, due to low quantum, cement exports to India would hardly
comprise 10 per cent of total exports in FY15. It is also estimated that the
overall cement exports at 9.3 million tons in FY12 is lower by 1.1 per cent from
9.4 million tons in FY11.